Good morning, ladies and gentlemen. My name is Jerome, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2019 Results Conference Call. Thank you. Now it's my pleasure to hand the call over to your host, Ms.
Maria Lee, Treasurer and Vice President, Investor Relations. The floor is yours.
Great. Thank you. Good morning, everybody, and thanks for joining us. I'm joined today by our Chairman, President and CEO, Dave Nord and our Senior Vice President and CFO, Bill Sperry. Hubbell announced its Q1 results for 2019 this morning.
The press release and earnings slide materials have been posted to the section of our website at www.hubbell.com. Please note that our comments this morning may include statements related to the expected future results of our company and are forward looking statements as defined by the Private Securities Litigation Reform Act of 1995. Therefore, please note the discussion of forward looking statements in our press release and consider it incorporated by reference into this call. In addition, comments may also include non GAAP financial measures. Those measures are reconciled to the comparable GAAP measures and are included in the press release and the earnings slide materials.
Now let me turn the call over to Dave.
All right.
Thanks, Maria. Thanks, everybody. Good morning. I know it's a busy morning this morning. It appears that April 30 has become a very popular date from when we first decided to move our earnings out.
So I want to make sure that we get through the stuff. We have a lot good things to talk about. So try and get through briefly and as we can to allow time for some of your other commitments. You can see from our press release this morning, but another quarter of strong earnings growth and free cash flow generation. Certainly feel confident about our market position and our ability to deliver differentiated results over the long term.
Couple of key items in the Q1, let me talk to and I'm on Page 3 of the slide deck that we sent out. As I mentioned, 1st and foremost, strong organic growth, with end market steady, growing modestly. Most of our end markets were up in the quarter with particular strength in the industrial gas distribution and electrical T and D. Importantly, and one of the key topics we talked about certainly for the second half of last year was around pricing. And our pricing actions continue to gain traction.
And we've turned the corner on price cost, which was a net positive for us in the quarter after being a headwind throughout all of 2018. We're actively managing price across the portfolio and remain focused on competing in areas where we can offer differentiated value and earn attractive returns. This is particularly true in lighting where we're starting to see the hard work Kevin and his team has put into his business over the last several years and really is starting to pay off, true overall and especially in Lighting. As we've said in the past, we remain disciplined in not chasing after low margin business and are comfortable with the trade off that entails on the volume side. And some of that is a result of the efforts that we started to put focus on last year in the breadth of our SKU offering and really taking a much more disciplined look into all of our and particularly our lower profitable SKUs and determining whether we could raise price, lower cost and if we couldn't do either of those to get the margins to an acceptable level, we would discontinue those products.
And we have that as an ongoing effort. And so that is going to in some periods of time, in some businesses, in some product lines, will affect our volumes, but all for the good long term. Aclara, another highlight for the quarter. Revenues are strong in the quarter, driven by continued strength in customer demand. Although the mix was a little less favorable than we had anticipated, which we'll talk about in more detail later.
Certainly, customer acceptance of the acquisition surpassed our expectations 1 year into the deal, and Aclara continues to fill the backlog and pipeline with new business. We expect this highly visible backlog and pipeline to drive some strong revenue and operating profit growth over the next several years as we execute on our longer term strategy to increase penetration at large IOU customers of Aclara Technologies and Solutions, and we are certainly well positioned to do so. Free cash flow. On the free cash flow front, we're off a strong start to the year, certainly a lot stronger than we typically are much stronger than we were in the Q1 of last year, which puts us well on track to achieve our full year commitments. Our balance sheet is strong and we're well positioned to start putting it back to work through accretive bolt on acquisitions.
We'll talk a little bit more about that later. We've made initial progress on our previously announced footprint consolidation and plan to ramp up our investment in the 2nd Q3. As we laid out last quarter, this is a multiyear story, which we anticipate driving visible earnings growth and free cash flow generation regardless of the macro environment. We're also continuing to work aggressively to improve our operational capabilities, talent and processes. Still early days of the journey, but we expect continued improved productivity and working capital management to drive our ongoing improvement in both operating margins and free cash flow.
And lastly, we're reaffirming our full year expectations for adjusted earnings per share of $7.80 to $8.20 per share and free cash flow conversion of at least 110% of reported net income. We're confident we're on our way well on our way to a solid start with our results in the Q1. And while still a lot of work to do in front of us in terms of our footprint, we believe we're well positioned to execute and deliver on our commitments. Just as I like to do a couple of key accomplishments in the quarter in different businesses on the construction and energy side, our Continental business, which is our gas distribution, the core of our gas distribution business, they won an award from a major national customer for 0 defects in a year, and that's the 1st plastic supplier that they've had to ever accomplish this. Our commercial industrial business, the wiring systems business was named vendor of the year in last year in 4 major customers.
The lighting business was awarded Plant Engineering Magazine Product of the Year awards for PowerHub and the Peloton High Bay light fixture. And most notable, Aclara was named the number 2 vendor by Navigant Research in field area network applications for electric utilities, very significant recognition of the capabilities that they have built and the opportunities and confirms what we see as the opportunities for that business in the market. So a lot of good things going on, but let me turn it over to Bill, and he can take you through some of the details in the financials for the quarter. Bill?
Thanks, Dave. Good morning, everybody. Thank you all for joining. Dave gave you the highlights from Pages 34. I'm going to start on Page 5, where we break down our end market performance.
And as you can see, the end markets are continuing to provide a constructive backdrop driving our financial performance. Of the 10% sales growth to achieve over $1,000,000,000 of sales in the quarter, five points of that were organic. So nice strong organic performance. And if we disaggregate that into its individual end markets, talk a little bit about non res for a second. We've got three lines of business with exposure in non res, all of them seeing e sync growth ranging between the low to mid single digits, I think consistent with 3rd party data on momentum there.
So positive story for non res. Industrial has been a highlight from the quarter, heavy being a little bit stronger than light for us. And again, consistent with some third party data where we see industrial production and manufactured goods and durable goods showing some good strength. On the oil and gas side, we do see a little bit of mixed performance there. On the oil side, despite having constructive energy costs in terms of price per barrel of oil, our exposure there being, just to remind everybody, more in the upstream, we prefer offshore and we prefer offshore content versus nonshore.
And that oil piece was sideways for the Q1. And that's in contrast to gas business, where we saw quite strong demand and strong shipments. We're seeing both maintenance as well as new conversions to gas on buildings driving demand there for less amount of components on the gas side. Within Electrical T and D, P distribution, a little bit stronger than transmission,
but a lot of
the order activity and quoting that we're seeing bodes well for transmission and distribution as we look out as well.
On the
reg side, we think that we were impacted by some pre buys in the Q4 there, and yet we see the resi market hanging in there in low single digits. So kind of again, across the board, very constructive end market, given us 5% organic growth in the Q1. Page 6, we'll switch to talking about our profit performance. And you can see adjusted operating income increased by 6% to 139 $1,000,000 Margins at 12.8% compared unfavorably to last year by 40 basis points. And as Dave highlighted, we had very successful execution on the pricing front.
That was quite broad effort shared by across both segments, electrical and power and across all the business units. And we believe that, that price overcame inflation that we experienced in the form of tariffs as well as material inflation and added about 0.5. Of margin to us. So we're still seeing on the material side, although not all raws, but as a basket, we're still operating in a net inflationary environment there. That 0.5 point of contribution, though, was absorbed by the impact from the acquisition, contributing lower margins than average and thus creating some headwind.
On the earnings per diluted share side, you see a 4% increase to 1.57 dollars and that those earnings had to absorb a higher effective tax rate in the Q1. We had an ETR of about 24.7% in the quarter versus last year in the low 21% range. We do expect that to be in our guidance range around 23.5% for the year. But that created a little bit of headwind for EPS. So the operating side, stronger than the EPS performance as indicated there.
Page 7, let's switch to breaking down that performance to our 2 segments, and we'll start with Electrical. You can see sales increase of 2% to $630,000,000 with FX creating a point of headwind. So organic growth of 3%, to which price was very large components. And in terms of where the growth came from, business units that were helping drive growth included gas area, industrial, particularly on the heavy side and commercial construction areas, harsh and hazardous, which exposed to the oil market that we talked about, would have been an example of a lower growth area. They were actually down.
So they would drag that number down a little bit. When we looked at the operating income there, impressive 11 percent increase on that sales growth and a noteworthy 90 basis points of margin expansion to 11.8%. Solid execution of the pricing strategy across all three operating groups in the Electrical segment. We had solid execution on the productivity front that Dave had referred to, And we certainly have adopted not wanting to chase volume for volume sake. And as Dave highlighted, some of that SKU rationalization work combined with some of that pricing work really helped drive very strong performance in Electrical.
We typically share with you Lighting performance specifically within the segment. Lighting business grew at 2%. There was balance between the resi and commercial and industrial halves in the business. Lighting 2 executed on price, which is quite good news for us. They covered both the tariffs and material inflation.
They experienced positive price cost, and we're able to expand margins, so solid contributions from Lighting and then into the segment. Page 8, we talk about the Power segment results. And you'll see strong growth at 23% increase in sales in the Q1 to 457,000,000 dollars Aclara was the largest contributor to that growth. You'll see we referred to organic as well as acquisitions. So Aclara was an acquisition for the 1 month of January as we closed on it on February 2.
So January is an incremental acquisition month, which you see added, drove 14% of 23%. And they also were a big contributor of the organic during February March, as Kate highlighted, customer acceptance there, very strong demand for their product, very strong. And so as well, we saw on the legacy side, domestic distribution was a growth driver, but the legacy business also had some difficult compares from storm volume that was strong last year as well as some softness on the international side. On the performance front in terms of operating income, we saw 2% growth to $65,000,000 Margins at 14.2% were down from last year. And again, similar to the story for the company where we executed well on the pricing strategy, and we got price to be above tariffs as well as material inflation, but that was absorbed by including Aclara, which contributed lower margins than the average and brought the margin down.
They Aclaris had pronounced seasonality in the Q1 that they have done historically. They plan their year to include that. The seasonality is stronger than other businesses of ours where weather impacts the installation productivity on the one side as well as the timing of shipments, which impact mix. And so we anticipate that will normalize in the balance of the year. And that's the seasonality that we have which you see here.
Turning to Page 9. Cash flow, which we have highlighted, the comparison year over year here between 2018 2019 is exaggerated by some of the onetime outflows we experienced last year, resulting from the Aclara acquisition as well as some tax reform items. There's about $25,000,000 you recall from last year of those one items. But even adjusting for that, an impressive increase, I think it's also constructive to think about how much on average we tend to see of our annual cash flow in the Q1. And seasonally, the Q1 is always our lowest.
And so it's very positive for us to see this level as much higher percentage of what we expect for the full year contribution. So it's good to feel ahead on the free cash flow front. And despite driven by, obviously, the higher net income, but really what's helping is the working capital improvement. And we're really working hard across the board between the receivables and payables. But I think the area that is consuming the most effort on our part is on the inventory side and just continuing to drive days down there and continue to get good cash flow conversion.
So certainly feel good about being on track to that 110% net income for the full year, and the team is working very hard to do better than that. And that certainly helps drive some of the capital structure considerations, which I'll ask Maria to share with you.
Thanks, Bill. Capital structure on Page 10. Our balance sheet remains strong. We ended Q1 with $205,000,000 of cash $50,000,000 of commercial paper outstanding. During the quarter, we paid down amortization on our term loan as well as funded the dividend, invested $23,000,000 of CapEx and bought back $10,000,000 worth of shares.
Our 4 tranches of senior notes have favorable rates in the low to mid-three percent range and have maturities that are well spread out with the next one in 2022. Our net debt to cap ratio is healthy at 42% and our leverage in terms of gross debt to EBITDA is about 2.5x. This is down from more than 3x a year ago pro form a for the Aclara acquisition. On a net basis, debt to EBITDA is about 2 times. We feel confident in our ability to continue our leverage given our cash generation and repatriation potential.
Importantly and consistent with our long standing growth strategy, we believe our balance sheet is in solid shape to support bolt on acquisitions near term. Now I'll turn the call over to Dave to talk about the outlook.
Okay. Thanks, Maria. So on Page 11, talking about our end market outlook for the year, our dynamics there are pretty steady. We continue to see low single digit growth overall. The one change here is a little tweaking down of the oil and gas.
Originally, we had said 3% to 5%, percent, keep it down to 2% to 4%, mainly given the softness we saw in particularly in oil in the first half, not on the gas side. But again, we suspect some pickup in that in the second half. So gas should be good for us and remaining strong throughout the year. As we talked about before, we do think there's some level of trade off between price and volumes. And so while we typically target outgrowing our markets, we're happy to grow in line, at least near term, at more attractive margins with the market.
But this is something we're going to continue to actively manage throughout the year. I'm very confident in our ability to manage this and deliver on our commitments. Turning to Page 12 then on the outlook. As I said, we're reaffirming our outlook for the full year. We continue to expect net sales growth of 4% to 6%, with end markets up low single digit, acquisitions contributing a point and then price realization on top of that.
I think that growth rate is very much consistent with what I saw recently in a survey of 200 electrical distributors. I think their forecast for the year was about 6% growth overall, which would include price. My experience says that they tend to be more positively biased. So I'd probably discount that by a point. But on the other side, you've got 200 electrical distributors who have really are on the ground and have a really good insight into what's happening.
So I would take that as a fairly reliable source. Obviously, it would depend on the different markets and product offerings, but I think that all bodes well for at least the market for this year. We continue to expect adjusted EPS of $7.80 to $8.20 That excludes tangible amortization of $1 and it but it does include $0.40 of restructuring related investment. We expect to ramp up our restructuring related investment in the second and third quarter. We laid out the framework for you last quarter, and we're reiterating those targets.
We're well prepared to execute and excited about the initiative. We've started some. We'll see more initiated in the Q2 and throughout the summer. We'll update you over the next several quarters as we ramp up and make take actions that we then can communicate. And obviously, on the cash flow front, we continue to expect free cash flow conversion of 110% of net income, well on our way with the Q1 performance.
And as Maria said, free cash flow is a critical and positive aspect of our story as we execute on our working capital initiatives and use that positive cash flow to reinvest in the business and reinvest in other businesses. So we put that all together on in the graph format on Page 13. You see we reaffirm our outlook with positive results year over year coming from operations. And I can't emphasize enough how strong we saw the operations in the Q1. And the results that we put up overcame the less than favorable mix that we saw at Aclara as well as the tax headwind that we saw in the Q1.
So really strong operating performance from the broad team. And so we'll manage through our footprint, our tax and expect to deliver consistently with what we've said so far this year. So with that, maybe I'll open it up to Q and A.
Your first question comes from the line of Nigel Coe from Wolfe Research. Nigel, your line is now
open. Hey, guys. This is actually Michael on for Nigel. How are you?
Hey, Michael.
Hey. Could you just walk through how you guys are seeing the cadence for price cost? We're kind of assuming that 1Q was a tough quarter. How do you see the remainder of the year?
Yes. I think, Michael, we anticipate that we need to continue to pull price. And we had been pulling price all through last year. So that price piece, you actually as you get to the second half, you end up passing some of the price increases that we'd implemented last year. On the second half of the equation, though, on the material side, particularly steel, which is a large raw material of ours, you'll start to see potentially some favorability, which creates, I think, the effect you're saying where you can end up with some contribution from that as the year progresses.
Got you. That's helpful. And then just one more. On the Lighting spend, does this change your view at all on the Hubbell portfolio and its totality?
Well, look, we've been investing in Lighting, as David mentioned, over the last several years. We've been taking some of their fixed costs out, been reorganizing the business. We've been investing in the front end on the agent side and it's good to see those investments paying off right now for sure.
Definitely. All right. I'll leave it there. Thanks guys.
Your next question comes from the line of Christopher Glynn from Oppenheimer. Christopher, your line is now open.
Thank you. Good morning. Good morning, Chris. Hey, I was wondering about the comment of investing in the agency side of lighting. Can you talk a little bit about specifically what's going on there?
Well, no, just over the last couple of years, we had added and strengthened our representation on the front end in specific markets, in, for example, the Southeast and the Midwest and out on the West Coast, Chris. So those are that's not new news. That's just yields on investments we've made over the last couple of years.
But I think importantly, Chris, that's something that Kevin and his team focused on. One of the reasons that contributed to our underrepresentation was our inability to actually perform at a level that good agents were expecting. So the first was to get the operations in line and performing with the right product mix and the right service levels, which then made it easier for us to be able to convince good agents to move over to a good company with Hubbell Lighting.
Sounds good. And then on Aclara, could you talk about the growth there a little bit? I'm curious about obviously your win rate is good, but curious about actual competitive displacements that you're seeing and share gain in that respect from Aclara? And how much of that is because Hubbell now owns them?
Yes. I think it's a little hard for us to attribute that other than anecdotally. I think we've gotten a lot of really positive feedback from our core customers that they're happy that it's in our portfolio of somebody who they value and trust the relationship with us and the quality of the products we provide and standing behind our products. So I do think there's some benefits there. But I think and I'm not sure that there is displacement that we see specifically.
I do think that the thing that will be good for us is to get more communication, higher margin communication products into that mix, Chris. And I think that combines what you had in your question where our traditional customers and those sales cycles are over a couple of years, right, if not over a couple of months or quarters. And that's what we're really looking forward to is the communication side of that growth catching up to the other side of the business.
Yes, Chris, I think one of the things that Bill just mentioned is on big projects, the sell cycle is a little longer. But I can tell you that there are examples at a smaller level, ones that you wouldn't notice of where there's been benefit on the legacy Hubbell Power Systems in Aclara customers that historically hadn't penetrated and vice versa, which is exactly the premise of the strategy for the acquisition. One of the elements bringing the technology, but also bringing a comparable market presence that we can build on. So I think there's a lot of good things going on, but the big hits are going to come over time.
And I've had the benefit of sitting in, Chris, on some customer meetings where we have both Aclara senior management with Hubbell Power Systems senior management and as Dave said, that's a really powerful meeting that's different than meetings that we used to have in either half. So I think there's a big complementary nature to that that our customer base is favorably reacting to.
Thanks for that. And last one, it sounds like price cost favorability might widen a little bit, the steel factor there. You also have restructuring was a little lower in the Q1. That's going to step up. Should those 2 as we think about the Q1 base, are those 2 kind of offsetting going forward?
Or is it more the net restructuring kind of lifts off?
I think it's the net restructuring that starts to pick up, Chris.
Got it. Okay. Thanks for the color.
Okay.
Your next question comes from the line of Deepa Raghavan from Wells Fargo.
Good morning all. Good Q1. It looks like it was better than your Good morning, all. Good Q1. It looks like it was better than
your expectations.
But the
full year guidance was maintained though. Just a question on that. How much of the full year guide being maintained is largely a function of historically maintaining guidance in April versus some of the incremental weakness you called out versus your prior expectations, example, oil and gas restructuring steps up. But generally, if you can help me why the guide remains unchanged and some puts and takes, that's helpful. And I have a follow-up.
I'll give you the overall and Bill can weigh in on any specific puts and takes. But clearly, if you go back in history, we just don't change early in the year because remember, we're largely a short cycle business. So our visibility is somewhat limited. So we're relying on market expectations. And so we're always cautious going coming out of the Q1.
Certainly, our results in the Q1 give me confidence that our guide is good and as opposed to some periods in the past where we might not have had that level of confidence, but we think it's it would be premature to change anything specifically, a huster is a major mover in there, which we don't have.
Yes. I think Deepa, if we were looking for what we learned in the Q1, I think there was a couple of important learnings. One was the market strength hung in there and 2, that our pricing strategy had some traction. So I think that those things underline some of Dave's confidence. It feels good to be off to a good start.
Got it. Can you talk about how the quarter played out by months, if you can? And specifically, if you can address the momentum exiting the quarter? And into April, generally, how do you feel about start to the current quarter? That would be very helpful.
Thank you.
Yes. I'm not sure there is much significance to monthly analysis as the year went by, Deepa. I think January can be a distorted month for us. There was probably some pull forward in some of the tariff sensitive areas in the Q4 that causes some softness in January that can also be affected by customer incentives. So I think as we analyzed our results by month, we didn't draw much momentum conclusions month to month, but rather looked at the quarter as being a good contributor.
We spent some time thinking about what the Q1 usually contributes from a sales OP and earnings perspective to the year. And it felt good to have reasonable comparisons there that were not depending on a back end load or anything like that.
So you feel good about April so far. That's the read for me, right?
Yes. I think what we've seen is consistent with our outlook, yes.
Thank you very much. I'll pass it
At this time, there are no questions on queue. Presenters, you may continue.
Okay, great. Thanks everyone for joining. This concludes today's call. Dan and I will be available following the call for questions. So thanks again for joining us.
Thank you. And that concludes 1st quarter 2019 results conference call. You may now disconnect.